Brookfield Asset Management‘s (BAM 1.60%) fortunes are tied to Wall Street in many ways. And with the S&P 500 index (^GSPC 0.14%) near all-time highs, some investors may be worried about the Canadian asset manager’s future. It’s not unrealistic to be worried, but there’s an important nuance here that could make this stock a buy right now for income as well as growth and income investors. Here’s what you need to know.
Brookfield Asset Management handles money for others
At the core of Brookfield Asset Management’s business is the fact that it manages money for other businesses and people. It generates income from the fees it charges for providing this service. There’s nothing unique about being an asset manager on Wall Street, with plenty of large companies doing exactly the same thing.
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One of the key factors for asset managers is the current state of the stock market. When investors are exuberant, money can pour in the door and the value of the money already under management can rise sharply along with broader stock prices. When investors are dour, however, money can be withdrawn, and if Wall Street is in decline the value of assets under management (AUM) can fall. Since the revenues and earnings of an asset manager are tied to their AUM, bull and bear markets have very different impacts on financial results.
This is, to some extent, true of Brookfield Asset Management’s business. But there’s a wrinkle. It is focused on what are known as alternative assets, which are popular today and tend to perform differently from the broader markets (which is part of the reason why they are popular). Brookfield Asset Management also has a large number of institutional investors that have different time frames and needs from individual investors, so the cash it manages is likely to be less transient. And the company has a heavy focus on infrastructure assets, which are bought and managed with a long investment horizon in mind. Quick gains aren’t the goal; generating reliable cash flows is usually more important.
In other words, the normal way in which an investor would look at an asset manager probably isn’t going to give a good view of the strength of Brookfield Asset Management’s business.
Brookfield Asset Management is building for the future
Brookfield Asset Management currently oversees around $550 billion of fee-generating assets. That money is spread across investments in renewable energy, infrastructure, real estate, private equity, and credit. Four of the five are specifically long-term approaches, with credit the lone standout. However, even in the credit space, Brookfield Asset Management’s Oaktree business has long been known as something of a contrarian investor. In other words, even in credit the business operates a little differently from the pack.
The company’s goal is to increase its fee-generating assets up to $1.1 trillion by 2030. Each of its investment approaches is expected to see material growth. Management believes that it has positioned the overall business well to take advantage of large trends, including moving toward cleaner energy sources, the digitization of the world, and de-globalization.
The really big story here, however, is what the growth in fee-generating assets will do for the dividend. The most recent dividend increase was a huge 15%. If management can grow the business as planned, it believes it can keep upping the dividend by 15% a year to the end of the decade. Add that to the well-above-market 3.1% yield on offer today, and Brookfield Asset Management is both an attractive income stock and an attractive growth and income stock.
Watch the company’s performance, not its stock price
To be fair, a bear market would likely drag down Brookfield Asset Management’s share price just like it would drag down the price of most other stocks. But that wouldn’t mean the business isn’t doing well; it would just mean investors are in a dour state of mind. If Brookfield Asset Management can live up to its growth goals, which isn’t unreasonable to expect, the long-term opportunity here is very attractive right now.
